Abraxas Petroleum Corporation
Q4 2007 Earnings Call Transcript

Published: 19 Mar 2008

[Operator:]

Good day ladies and gentlemen and welcome to the 2007 Abraxas Petroleum earnings conference call. My name is Finnie and I will be your coordinator for today’s conference. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Chris Williford, CFO. Please proceed sir.

[Chris Williford:]

Thank you. Welcome to the Abraxas 2007 financial results conference call. Bob Watson, President and CEO of Abraxas joins me today for the call. After Bob’s comments we will be available for any questions that you may have. Just a reminder that today’s call is being taped and a webcast replay will be available beginning tomorrow. More information regarding the playback and how long it will be available will be provided at the end of this call. Before Bob’s comments, I'm obliged to tell you that statements made in this call looking forward in time involve known and unknown risks and uncertainties which may cause the Company’s actual results in future periods to be materially different from any future performance suggested in this call. In the context of forward-looking information provided in this call references made to the discussion of risk factors detailed in the Company’s filings with the SEC during the past 12 months. 2007 represented the first year end reporting of operations following the formation of Abraxas energy partners LP in May of last year. The published financial statements for 2007 represent a consolidated presentation for the year as dictated by GAAP with 100% of the partnerships activities combined with all of the Abraxas retained operations. The share over the partnerships earnings or losses owned by others falls out of our consolidated P&L at the bottom of the statement in a line item as titled minority interest. Now Bob Watson will provide his overview for the just completed year and some thoughts on the future at Abraxas.

[Bob Watson:]

Thank you, Chris and good afternoon. We call 2007 a water sheddy year. I am not going to regorge to take the transaction that we did last May where we formed and financed our master limited partnership, Abraxas Energy Partners but it’s apparent that not many people understand it. We trade in a market place as if we still have an over levered balance sheet and the facts are we have no debt in Abraxas Petroleum for the first time in over 30 years. We trade like we are not profitable yet we just reported our fifth consecutive year of positive earnings. We trade like we are not growing reserves, we increased crude reserves last year by 8%, we replaced 219% of our production at an all-in finding cost including future development cost, are slightly more than $3 per mcfe. Well setting the stage for an actual -- an active and successful 2008. We traded as if we are not growing production. Subsequent to the St. Mary acquisition announced several months ago and closed at the end of January, our combined production of approximately 28.5 million cubic feet of gas equivalents per day is up over 60% over the last seven months of ’07. We traded as if we have no posses. Abraxas Energy Partners will go public someday. I am confident that the market will return for oil and gas reserves in the master limited partnership format and when that happens we could go public possibly at a price appreciably higher then the price imputed in our Abraxas Petroleum share price today. Abraxas Energy Partners gives Abraxas Petroleum the ability to participate in a creative acquisition like the St. Mary transaction and as Abraxas Energy Partners grows cash distributions to Abraxas, petroleum will increase. Now why is all this happening? Other than the general market Malaise and interpretations small Cap E&P companies have generally not participated in the commodity price rally like the larger Cap E&P companies have. We’ve had a lack of Abraxas petroleum visibility in the market place due to the quiet periods associated with Abraxas Energy Partners registration with the Securities and Exchange Commission and as Chris mentioned GAAP accounting required consolidated financials are confusing, no doubt about it. There has been an apparent lack of activity on behalf of Abraxas in 2007 and I say apparent because it’s not true and the market just doesn’t understand the new Abraxas petroleum story. Now what do we plan to do about it? Well, we can’t do much about current market conditions, wish I could, but history has shown that small Caps are the last to participate but they eventually do participate in commodity price induced rallies. When the time is appropriate and I can’t tell you when that might be, we will increase our visibility within the limits imposed by our registration process at the time with conference presentations and road shows, GAAP required consolidated financials; that means the hedges, the debt, the hedge losses, the interest costs of the partnership show up on Abraxas financials. Abraxas is not -- these are not Abraxas items. They are not recourse to Abraxas Petroleum in any way. Now, I don’t agree with this presentation; they are confusing and we have tried to show Abraxas Petroleum stand-alone as we did in the year-end release. Unfortunately this is going to increase the confusion because if you use this as a base year you have to keep in mind that these numbers include five months of Abraxas Petroleum prior to the formation of Abraxas Energy Partners. Now in future presentations which will be on our website and there will be conferences and road shows, we will attempt to annualize the last seven months of 2007 as a base year for comparison purposes. 2007 field activity was slow, but doesn’t mean we weren’t busy, gearing up for a busy 2008. We spent a lot of time with the formation of Abraxas Energy Partners and subsequently the St. Mary acquisition but we also worked on land issues, partner issues and most frustratingly government issues that cannot be done much in advance of our actual drilling operations. We are now going strong. We have already drilled a 13,000 foot Wilcox well in South Texas in which Abraxas Petroleum owns a 63% interest. Given a break in the weather today that well will begin testing down line this afternoon. It appears to be a strong well. We are currently drilling below 14,000 feet on a 17,000 foot horizontal Edwards well in South Texas in which Abraxas Energy Partners owns 75%. When that well is finished we will spud another 17,000 foot horizontal Edwards test in South Texas in which Abraxas Petroleum will own 100%. Now these Edwards wells were planning to use new technology isolation packers and stage frac which have proven very successful by other operators in the Edwards trend in increasing production and reserve. We are very excited about this new technology and what it might do to our production profile. In West Texas we plan to spud soon a 12,000 foot Devonian oil well in which Abraxas will own 100% and we expect to commence shortly drilling development oil wells and a proposed water flood that we have in West Texas in which Abraxas will own 100%. We also plan and perhaps of most interest to most people several horizontal Mowry shale wells in Wyoming hopefully this summer and I say hopefully because we have yet to receive our drilling permits from the government. We are hopeful that we will receive them around June which will allow drilling activity to start during the summer months. Keep in mind that Abraxas Petroleum is not hedged. We are enjoying the current commodity price environment and because of the structure of master limited partnerships in the upstream business they have to be hedged in order to protect the sanctity of distributions. So Abraxas Energy Partners is 85% hedged at prices that are less than current and thus the hedge losses reported on the consolidated balance sheet. But keep in mind, in any new production that comes on stream is not hedged at the time and new hedges can be placed at current prices as opposed to month oil prices. In closing we at Abraxas Petroleum fully understand the Abraxas Petroleum story and it’s my job in the near future to make sure that the market understands it too. With that we will open it up to questions.

[Operator:]

(Operator Instructions) And you first question comes from the line of Glen Mattson from GTK Capital.

[Glen Mattson:]

Good afternoon, I see on your press release you have Abraxas Petroleum Corporation stand alone, 12 months December 31, 2007. Wouldn’t it be more interesting to know what you did in the last quarter when it was a separate corporation?

[Bob Watson:]

Well the problem with the last quarter is that it is all jumbled up with consolidation issues with the partnership; the St. Mary’s acquisition has a significant impact on both entities so it really doesn’t give you a good story of what Abraxas is going forward. Those numbers are in our 10-K, it’s not like we are trying to hide them, we just don’t think that they represent Abraxas going forward.

[Glen Mattson:]

Okay alright, what can we expect do you think then?

[Bob Watson:]

Pardon me?

[Glen Mattson:]

Going forward what can we expect in line of production for Abraxas Energy -- Petroleum rather.

[Bob Watson:]

We are not issuing guidance at this time. We’ve said before that we expect a significant growth in production this year especially in Abraxas petroleum. We also expect Abraxas energy to grow as well. The problem that we have in issuing guidance is that we are starting from a very low base in Abraxas Petroleum and one well can have a very significant impact percentage wise on our production. Therefore any guidance that we would issue would be a very high risk at being correct one way or the other so we’ve elected to not issue production guidance at this time.

[Glen Mattson:]

Okay going into your operations then in South Texas, you are testing the well that guides at number Orange County; you think that’s a strong well? What about the other well you have done here in Lavaca County that’s being -- that’s a 17,000 foot drilling operation you are doing there?

[Bob Watson:]

Yes and we are currently drilling we just set protection casing at about 14,300 feet. We should be drilling ahead sometime this evening.

[Glen Mattson:]

Okay and when do you expect that know the result of these two wheels.

[Bob Watson:]

The Gisler we should know results soon as it cleans up and start flowing which will be this week hopefully, we are having very stormy weather in South Texas right now and we don’t whether we can get all the work done today that we need to get done but hopefully we will and the first horizontal well probably sometime late April, May 1 type activity. We should have some news out on that.

[Glen Mattson:]

And the third well that you are drilling in that group in South Texas, when do you expect to have results on that?

[Bob Watson:]

Well that -- the rig that’s drilling -- the one that’s at 14,000 feet right now is the same rig we will use to drill the next one, so it will be started as soon as this current one is finished drilling.

[Glen Mattson:]

Okay, so in Wyoming you say here that you expect to get the permits this quarter, in the second quarter rather. Is it possible that you have to wait longer on that or your optimistic on that or what’s your feeling on that?

[Bob Watson:]

Well I hate to say I’m optimistic because I have to eat my words so many times on this venture, but we do not feel that the government can hold this up much longer than they already have. We have complied with everything we need to comply with. Hate to say it but we are just waiting on some burke breed right now or make themselves visible and -- or invisible in our area so that the government will know that they are not trying to breed in our area and unfortunately the breeding season starts around April 1, so we have got some time to wait. The wildlife surveys will be done at the appropriate time according to the government and once those are done, they have -- we expect to have permits issued fairly shortly thereafter.

[Glen Mattson:]

Okay. So, basically a big part of land you own there. Is that whole area part of a breeding location or a nesting site or -- what are your feelings on that?

[Bob Watson:]

We don’t feel that it’s part of a nesting site but the government doesn’t buy that argument. They have to test every -- or survey every location to determine that there are no risk factors or sage-grouse nesting or breeding in that area.

[Glen Mattson:]

I see. Okay, well, thank you and good luck on your drilling at this point.

[Bob Watson:]

Thank you very much appreciate your interest.

[Operator:]

(Operator Instructions) Your next question comes from the line of Tom Mattson, a private investor. Please proceed sir.

[Tom Mattson:]

Hi Bob, Hi Chris.

[Bob Watson:]

Hi, Tom.

[Chris Williford:]

Hello Tom.

[Tom Mattson:]

I wondered with almost being all the way though the first quarter if you can give us any kind of guidance for Abraxas stand-alone capacity, how much -- what more will be doing for the first quarter, earnings wise?

[Bob Watson:]

Tom, the St. Mary’s acquisition is a very significant acquisition for us. It involves about 1,500 new properties. We are in the transition process right now. It’s going very smoothly but the first thing we want to make sure that we are doing right is the cash flow portion of it. So the reporting parts have taken a backseat to the cash flow parts. So we are really not in a position to certainly go to the public with any guidance. We have some numbers internally that we are using but there is a high degree of variability in these numbers still as we get the processes in place to know what we are doing on a weekly or monthly basis and hopefully -- eventually on a daily basis.

[Tom Mattson:]

Okay, Will first quarter earnings reports, it sounds like mid-May, first, second week of May, somewhere in there?

[Bob Watson:]

Yes.

[Tom Mattson:]

Okay. Going back to the new wells that are being drilled and coming online. I know three of the four of Abraxas Petroleum, are they oil or natural gas?

[Bob Watson:]

The one that’s testing today will be gas and condensate. The two Edwards wells will be gas. The activity in West Texas will be all oil and Wyoming will be oil.

[Tom Mattson:]

Okay, and then regarding the IPO progress because all the people work for the MLP; has that been submitted already -- has that fully been submitted to the SEC, are you still in the process of that, what stage on you are at there?

[Chris Williford:]

We have an active registration statement at the SEC right now. We have made four amendments to that statement and we got a no comment letter from the SEC in early December. We elected to go forward with the St. Mary’s transaction which will require another amendment to the active registration statement to basically update financials from both the core Abraxas properties and the newly acquired St. Mary’s properties as well as reserves from both of those properties into the registration statement. The reserve work on the St. Mary’s properties by our consulting engineers DNM has not been completed yet. Hopefully it will be in the fairly near future and as soon as those numbers are available we will drop them into the registration statement as an amendment which is essentially putting it back in the lap of the SEC. They have the opportunity to continue reviewing or they could say you are good to go and we will be ready to go public if and when the markets present themselves to us.

[Tom Mattson:]

Okay so just in a hypothetical situation saying that everything goes well and you get the paper work done relatively soon when can you foresee it taking -- if that was the case when would you foresee doing the IPO?

[Bob Watson:]

I have a feeling that we are going to be much -- we are going to be ready much before the markets are ready. The markets are not treating MLP’s very well these days -- as they are not treating much very well. Our institutional partners and Abraxas Energy Partners are discouraging us to go public in this environment. They want us to go when the markets right, so I will throw the question back at you, you tell me when the markets are going to turn around and I will tell you we are not going to go forward with our IPO. We don’t have to go right now, so there is no reason to go into our choppy market.

[Tom Mattson:]

Okay, so I guess what I was -- the other question that I would ask is kind of in aside for that is are there any kind of negative aspect in not bringing the IPO public quickly? Can you guys continue to operate business-as-usual so to speak without taking the Abraxas Energy Partners in an IPO capacity?

[Bob Watson:]

We are very comfortable continuing to operate the way we are. Our metrics in the MLP are improving on a daily basis. Our partners are comfortable staying in a private partnership, our bank relationships are strong, interest rates are cheap, so we very little of any negatives other than the fact that we won’t have the public visibility of what we are doing in the partnership out there.

[Tom Mattson:]

Alright, okay I can understand that. I guess my last question then is in terms of -- you said in your initial statement which I thought was pretty clear that there is difficulty in understanding what’s going on as far as the public is concerned and your average investor, in understanding the hedges. How is that to be viewed? Because I am not sure that I have got a clear understanding of it. You obviously made money through the transaction last year, but kind of on a quarter-by-quarter basis, is there one way to fairly read what you are doing on a quarter-by-quarter basis in terms of the hedging.

[Bob Watson:]

Well, I think what we are trying to do on issuing Abraxas stand alone numbers which are not GAAP, you should be able to see what we are doing and since Abraxas has no hedges in place it will be on an un-hedged basis. I would expect that profitability will be a lot easier to predict in Abraxas Petroleum stand-alone than it will be on Abraxas consolidated because as you know under new hedge accounting rules, all hedges have to be mark-to-market at the end of the quarter and that can create some extreme volatility in earnings or losses depending on where the commodity markets are at the time. Keep in mind that part of the normal structure of a master limited partnership in an upstream is that you lock in prices for as far out as you can see in order to rightly reduce the risk of making distributions. The most important part of a master limited partnership in an upstream business is the distribution and as long as you continue to make distributions and hopefully grow distributions on a quarter–to-quarter basis, the MLP should have a very favorable response in the public markets. It’s the time when you can't make your distributions or you have to reduce your distributions that you become a member of the penalty box and those penalty boxes are hard to get out of. So in order to reduce the commodity price risk in a partnership you hedge production, in our case we have hedged it up four years and that locks in our ability to make distributions which is all important. The way you need to look at Abraxas is, look at Abraxas on a stand-alone basis and then look at the amount of cash that’s being distributed out of the partnership. That’s the key and that way you don’t need to worry about hedges, you don’t need to worry about interest costs, those are partnership items and they come before the distributions come out, as far as Abraxas Petroleum is concerned stand-alone operations plus the distributions from the partnership is what you should look at and that’s what we are going to attempt to report on a go-forward basis.

[Tom Mattson:]

Okay and that’s fair enough. I mean that sounds reasonable. IF I am looking at the numbers on the website on a consolidated basis you guided to have the particular dollar figure associated to the share price. When I'm looking at the stand-alone column here I -- is there a price per share here that I have not seen on a quarterly perspective?

[Bob Watson:]

No, there is nothing. There is nothing on -- I guess you can divide those numbers into 49 or 46 million shares with the weighted average -- okay and Chris was saying that distributions are not considered income, they are just considered revenue. So I think -- you need to look at the numbers in total probably.

[Tom Mattson:]

Yeah, Chris, is there any way to kind of -- you know what I'm saying -- to try to boil it down on a per share?

[Chris Williford:]

Unfortunately, there is not, Tom because GAAP doesn’t allow us to do that and to try to come up with that -- I'm afraid it’s so confusing that it would really mislead the reader and I just don’t think it’s practical for somebody to look at on a consolidated basis understanding that there are some issues in the consolidated that fall out on the minority interest line but nevertheless if you are going to compare apples to apples at Abraxas your going to have to do it on a consolidated basis, I think.

[Tom Mattson:]

Yeah, and I was just trying to see if there was an easier way in kind of in Layman’s terms to understand productivity on a quarter-by-quarter basis from the stand alone position. So okay, fair enough I appreciate it. Suspicions is here, so.

[Tom Mattson:]

Well, let me add something Tom before you get off. We are showing what Abraxas stand alone production is…

[Tom Mattson:]

Okay

[Bob Watson:]

On this column but as I said in my opening remarks, this should not be used as a base year because there are five months. The first five months of the year are Abraxas -- three Abraxas Energy Partners and so the production that went into Abraxas Energy Partners is actually included in these numbers for the first five months. So what I am going to endeavor to do going forward on our presentations because we really can’t do it in a press release is annualized the last seven months of Abraxas stand alone and we will endeavor to use that as a base year going forward to compare actual results to the past results.

[Tom Mattson:]

Okay last question. Would you still estimate the approximate evaluations for Abraxas to be at about $44.80 in change?

[Bob Watson:]

I haven’t look at the most recent ones. We will be updating that for our I think second week of April presentation, it’s IPAA. We will be using these numbers that came out today and I see that they are certainly not going to vary much from that number, maybe it will be up a little bit, I don’t know.

[Tom Mattson:]

Okay, thanks for your time.

[Bob Watson:]

Thank you.

[Operator:]

And from GTK Capital; your next question comes as a follow up from the Glen Mattson. Please go ahead.

[Glen Mattson:]

Hi again. When can we expect to have separate numbers for the Petroleum Company versus the Energy Company?

[Bob Watson:]

They are in the press release that was issued today on the last page.

[Glen Mattson:]

Right, but I mean going forward.

[Bob Watson:]

We will have stand alone numbers every time we issue our earnings.

[Glen Mattson:]

Right but I mean as far as GAAP is concerned. Do you always have to conclude on a GAAP basis the energy partners?

[Bob Watson:]

Yeah. We will not be able to deconsolidate as long as we are deemed and controlled by Abraxas Energy Partners, we have to consolidate.

[Glen Mattson:]

Okay and are these rows you mentioned before that are in production or not production being acceleration; will you be issuing a press release once you find out what’s going on there?

[Bob Watson:]

Yes we will.

[Glen Mattson:]

Okay, that what we look forward to. Okay, thanks very much.

[Bob Watson:]

Thank you.

[Operator:]

And your next question comes from the line of San Ditomi, a private investor.

[San Ditomi:]

Bob in year February 13 presentation you talked about exploratory plays in South Texas in Bee County in the Janssen prospect. You haven’t talked about Bee County, I don’t think.

[Bob Watson:]

No I haven’t started it yet. It’s on our list of things to do this year. The Janssen is the Gisler well which we have been talking about, appears to be a strong well and should be testing into the sales line today hopefully.

[San Ditomi:]

Second question; Quick Silver has been talking about being close to commerciality on their dollar base and properties in West Texas and they seem to be excited about their Woodford horizontal test. What conversations that you’ve had with them and what do you think the implications are for your properties?

[Bob Watson:]

Bill we have not had any conversations, at least I haven’t. We do know, we have watched their presentations and we are aware of what they are doing and we are trying to find out as much information about their wells as we possibly can and all I can say is that we understand that they are excited about it. If it works where they are, possibly could work where we are. We are in the very enviable position of owning minerals as you know, so we don’t have to do anything anytime soon. We will just wait for others around us to prove up the concept and prove up the technology and prove up their economics, and then we will make decisions from that point.

[San Ditomi:]

Okay, thank you.

[Operator:]

And your next question comes from the line of James Lazarus, a private investor.

[James Lazarus:]

Hi, Bob, how are you?

[Bob Watson:]

Good, James how you doing?

[James Lazarus:]

Good. You know it’s been very difficult to figure out the guidance and I know you have tied it to capital expenditures as far as giving some idea of what’s going to be happening in the future. Can you break down the capital expenditures like quarters, the $35 million that you got plugged in for Abraxas Petroleum and the $20 million for the Energy?

[Bob Watson:]

I would say you are not going to be too far off if you just divide it equally each quarter. That’s what we are going to try to do from an operations standpoint just from a cash flow basis. It seems to work for us.

[James Lazarus:]

(Cross Talk) for the first quarter, have you sensed about a quarter of this?

[Bob Watson:]

Probably not but we will -- we are going to have more rigs working in the second quarter, so we will get caught up pretty much by the end of the second quarter.

[James Lazarus:]

Okay, so it’s not something where all the expenditure is going to be in the last quarter and we are not going to see the --?

[Bob Watson:]

No, no, no. we are gearing up right now and we are waiting on rigs and getting rigs and we are not holding up for anything that we have control over.

[James Lazarus:]

Okay, great. That was my question, thanks a lot.

[Bob Watson:]

Thank you.

[Operator:]

And from FAMCO your next question comes from William Adams.

[James Lazarus William Adams:]

Hey Bob, this is Bill Adams.

[Bob Watson:]

How you doing?

[William Adams:]

Great. I just wanted to ask you for comments on outlook for the acquisition -- in the acquisition market. Looks like you got a really good deal on the St. Mary’s properties. It’s a PV channel was $178 million; you only paid what $140?

[Bob Watson:]

131 at closing.

[William Adams:]

Yeah. Is that indicative of what properties go for and can you just discuss the outlook for another acquisitions?

[Bob Watson:]

We are continuing to look. We have staff involved in doing that on a full-time basis. We have not found anything else that really comes close to the type of deal we where able to make in St. Mary’s. Obviously if we can find another one, we will be aggressively after it and it’s hard to predict when those might come around. I think we were the very fortunate victim of a perfect storm of issues on the St. Mary’s deal. I think they targeted this package to the MLP market and the MLPs were starting to implode at that time. So we were basically the only MLP negotiating on it and they had a desire to get closed pretty quick. So we were able to take advantage of their desire and our ability to close quick and got a deal done. Whether we can replicate that anytime soon, I can't promise it. The deal market is very competitive.

[William Adams:]

Okay.

[Bob Watson:]

Probably less competitive today than it was six months ago though however because the MLPs just don’t have the availability of cheap capital like they used to.

[William Adams:]

Do you see yourself present to -- every time on your balance sheet to do a deal?

[Bob Watson:]

Not like we used to. We have learned a lesson. I am too old to do it again.

[William Adams:]

Okay while we are in a different commodity environment say probably than you were in the past so.

[Bob Watson:]

Right

[William Adams:]

Okay we will get back to you.

[Bob Watson:]

Thank you very much appreciates your interest.

[Operator:]

And your next question comes from the line of James Lahian a private investor.

[James Lahian:]

Hi Bob.

[Bob Watson:]

How are you doing?

[James Lahian:]

I am doing good. A few quarters back there was a shortage of drilling wells and that was at a time when oil and gas was a bit lower than even now. Are you guys finding -- you have the availability of rigs?

[Bob Watson:]

We’ve -- the industry is enjoying more availability and certainly better efficiency then we have had in quiet some time. We had to wait a little while but at least we know when we are going to get a rig, about when we are going to get it. Couple of years ago as you mentioned, we didn’t have a clue as to when we could get a rig, we just had to wait in line. So that part of our operation is a lot smoother than it used to be.

[James Lahian:]

Okay great and good luck with your drilling.

[Bob Watson:]

Thank you very much.

[Operator:]

(Operator Instructions) Your next question comes from line of Jeff Lengarden, a private investor.

[Jeff Lengarden:]

Hi Bob.

[Bob Watson:]

How are you doing?

[Jeff Lengarden:]

Oh just fine. Question on St. Mary’s; 1,500 wells, do I have that right?

[Bob Watson:]

1,500 properties, some of the properties have multiple wells on them, so yes it’s 1,500 plus wells.

[Jeff Lengarden:]

What kind of production does that mean and how much work for you guys does that mean and has that eaten all your time? It certainly sounds outrageously numbered.

[Bob Watson:]

Well, obviously the transition is taking a lot of our time, but once the transition is completed it’s just a matter of adding computer power and all that kind of stuff. It’s certainly not going to take a lot of executive and higher end technical time, we will be ready to do some more. But it’s about little over 2000 barrels a day of equivalent production. It’s only 240 net wells which with -- out of the 1,500, so that would indicate that there are some small interest wells that we will probably divest ourselves over time just to become more efficient, but we need to get our hands around what we own before we decide which ones go and which ones we keep.

[Jeff Lengarden:]

Alright so you are maintaining and doing all the work for St. Mary’s project is it --?

[Bob Watson:]

On these properties we took over operations March the 1. We actually take over accounting operations this next Monday. So at that point of time we will be doing a 100% of it.

[Jeff Lengarden:]

I see and has this held up the projects in Texas and so forth that you wanted to do that you were talking about at the last call and the previous calls to that.

[Bob Watson:]

No, it’s not had any impact whatsoever. We’ve continued the rigs that we had scheduled and that’s why we are busy drilling now.

[Jeff Lengarden:]

Okay, well you have two wells, two rigs you own is that correct?

[Bob Watson:]

Those are work over rigs out in the West Texas. They are just service wells, they don’t drill wells and we keep…

[Jeff Lengarden:]

-- everything else?

[Bob Watson:]

Pardon me

[Jeff Lengarden:]

You have other companies or other suppliers of these rigs that are doing everything else.

[Bob Watson:]

Yes.

[Jeff Lengarden:]

Totally dependant on them?

[Bob Watson:]

Yes other than just a routine well service with our own rigs, we rely on third party contractors.

[Jeff Lengarden:]

Okay, well congratulations on everything. It sounds swell. I just can’t comprehend why that market can’t seem to catch on.

[Bob Watson:]

It’s been frustrating around here too and I'm going to do my best --

[Jeff Lengarden:]

I can imagine. Yep, well I'm frustrated too. So welcome -- but thank you very much and congratulations for everything. I got a feeling everything is going well except for the understanding of it.

[Bob Watson:]

Right.

[Jeff Lengarden:]

Thank you.

[Bob Watson:]

Thank you.

[Operator:]

And you have a follow-up question from the line of William Adams from SAMCO. Please proceed.

[William Adams:]

Yeah Bob, I want to ask you, how does the unit profitability of the St. Mary’s properties compared with your current operations?

[Bob Watson:]

The St. Mary’s well -- well, let me summarize that the St. Mary’s production has a higher percentage of oil production which means a higher percentage of pumping wells as opposed to flowing wells than what Abraxas has had. So our per unit operating expense will go up because it costs more to operate a pumping oil well than it does a flowing gas well. Now that being said they are still very, very profitable especially in this commodity price environment but the LOE number will probably trend upwards once we get the St. Mary’s numbers fully integrated but they shouldn’t be had a surprisingly high number, that should be a normal number considering the percentage of oil production that we have.

[William Adams:]

Okay, and what’s the differential in that part of the country?

[Bob Watson:]

Well, they vary -- okay, year-end the differentials on oil were $9.38 and the differentials on gas were $1.28 on the St. Mary’s production.

[William Adams:]

Okay, and maybe you released this but how much of your dollars that you are budgeting will go to the St. Mary’s properties?

[Chris Williford:]

We haven’t decided yet, we have not released it. What we have said is in the $35 million of Abraxas Petroleum capital budget. We will probably include some St. Mary’s projects but they haven’t been completely identified yet.

[William Adams:]

What about the partnership, how much will be in the St. Mary’s?

[Bob Watson:]

Probably a fairly small percentage initially until we get our arms around it. We are drilling some outside operated wells in the partnership right now that came through the St. Mary’s acquisition. It’s not a big number, but I would say round numbers, three fourth of the $20 million or $15 million will be old Abraxas properties and then $5 million would on the new St. Mary’s properties, just round numbers.

[William Adams:]

Okay, and an even a smaller number for Petroleum?

[Bob Watson:]

Well, I don’t want to commit myself now because we see some very, very interesting projects in the northern Rockies that we don’t have a gun at our head to do them but they look very lucrative and they would require some expensive wells. So on a percentage basis, that might change between the three quarters and one quarter but we have that flexibility to look forward to this year and just can't predict right now what it will be.

[William Adams:]

How does your G&A kind of go up significantly with this acquisition?

[Bob Watson:]

The G&A per unit of production should come down. We have added some people, about ten people company-wide to handle all this new production which isn’t bad considering we were at 50. We have now come close to doubling the size of the Company and only added ten people. So, that would imply right there that the G&A per unit of production should come down.

[William Adams:]

Okay, great, thanks again.

[Bob Watson:]

Thank you.

[Operator:]

And your next question comes from Grad Me a private investor. Mr. Me, your line is opened you may proceed with your question.

[Grad Me:]

Thank you. Bob, just wanted to get your take on where do see this crazy oil market going?

[Bob Watson:]

Well, if I knew I wouldn’t be sitting here talking on the phone, I’d be retired on the golf course, but you’re right, it is crazy. It’s – there are a lot of influences in the market that are not historic type influences. I think the big wild card is what the Chinese and the Indian economies are doing. As long as they stay strong, I think there’s going to be a strong demand for world wide crude productions which should probably more than off set any decrease in demand for any potential recession that might happen here in the United States, so I am pretty bullish on oil. I think gas markets are getting a little Topy at this point. I would expect them to either hang in here or drift down a little bit, but then next winter, watch out.

[Grad Me:]

In your own mind Bob, what do you think the consumer is going to wind up paying for a gallon, it’s only in here, this summer here in Texas.

[Bob Watson:]

In Texas, probably not a whole lot more than it’s paying right now. I just don’t see it spiking up unless they change taxes or something like that, but I think it’s probably about where it is after this summer. It’s real cheap compared to a gallon of Starbucks coffee.

[Grad Me:]

Isn’t that the truth? It’s ridiculous for what they get for that product and what you get for your product.

[Bob Watson:]

That’s right.

[Grad Me:]

This doesn’t make sense, not there. Anyway Bob, I’m out here in Phoenix Arizona and really appreciate the job your doing in running the Company. I think you guys are going on the right track and proud to be a stock holder with you.

[Bob Watson:]

Appreciate it very much and appreciate your support.

[Grad Me:]

Thank you sir.

[Operator:]

And your next question comes from the line of Tom Aimer. Please proceed sir.

[Tom Aimer:]

Hi Bob.

[Bob Watson:]

How are you doing?

[Tom Aimer:]

Great performance in 2007.

[Bob Watson:]

Thank you.

[Tom Aimer:]

Question is on the Northern Rocky stuff. Is that have to do with your St. Mary’s acquisition and if it’s in the bacon can you compare that to what’s in the Mowry.

[Bob Watson:]

Well, we think it’s very similar. There are some aspects of the bark and a little bit different than the Mowry shale, from a geologic stand point, but from a technical stand point we think they are very similar and we are very excited about using the technology that’s been proven in the bark and in the Mowry, haven’t been tried there in the Mowry yet. We think it has a very good use there and just chopping up the bit to get our permits and get going.

[Tom Aimer:]

Very good and then this year is primarily the drilling is about oil. Do you see that next years will probably be the same?

[Bob Watson:]

Oh, I think it just depends. We’ll look at projects from a rate of return basis using current prices and if the gas project has a better return to the share holders that’s what we’ll do, we are really not all that inclined to target one or the other. It just so happened that this year when we set our budget it looked like oil projects were the things to do and they still are don’t get me wrong, but with the recent run up in gas prices that’s made some of our gas projects equally as attractive, but not more so than the oil projects, so we are going to continue on with our oil project budget.

[Tom Aimer:]

Very good. Well, thanks. Looking forward to a great 2008.

[Bob Watson:]

We are too. Thank you very much.

[Operator:]

At this time we have no further questions in the queue.

[Chris Williford:]

Thank you. Thanks again to our listeners today for your time and interest in Abraxas. For those wishing to listen to the audio webcast replay beginning tomorrow and running for at least the next 60 days, please visit the Abraxas website at www.abraxaspetroleum.com under the Investor Relations section. This concludes the Abraxas call, thank you again.